Lupin Limited (500257) Earnings Call Transcript & Summary

Hello, and welcome, everyone. Welcome to Lupin Investor Communication FY 2021. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Lupin management. Thank you. Over to you, sir.

Yes. Hello. Good evening. My name is Kamal Sharma. I have with me my colleagues, Vinita Gupta, CEO; Nilesh Gupta, the Managing Director; Ramesh Swaminathan, CFO of the company; Arvind Bothra, Head of Investor Relations; and Vishal Rathi. And it's my pleasure to welcome you all on all our behalf. You already have the financial results in your hands. And you would have seen that we've had a good quarter. And what you get to see is that while we might have had a lower sales by 4% sequential quarter, our sales year-on-year are flat for the quarter. Reasons are pretty obvious. We -- the fourth quarter for India, which is almost 34% of our business is generally soft, and it was a very poor in the U.S. So they were obviously challenges for some of the major projects that we have in that group. But what's interesting and what you would have seen already that on a corresponding quarter basis, we have improved our EBITDA substantially by almost 500 basis points. On annual basis, we are more or less flat on revenue, with about a drop of about 1 point odd percent. Given the entire year ridden with COVID challenges across geographies, I think that has been -- the team has done reasonably well to at least maintain the revenues. And what is to be very heartening is that the EBITDA has definitely improved by about 220 basis points, which we have promised you in the past. And we do hope to keep working on this even as we go forward. With that little commentary, I would hand you over to Ramesh to share with you the financial details, and then we'll open the floor for question and answers. Thank you very much, and over to you, Ramesh.

Thank you. Thank you very much, Dr. Sharma. Again welcome to our results webinar. I wish all of your keeping well and your family members also. They're all doing well. It's a terrible time out there. So it's important that we also stay safe. Let me walk you through the key aspects of our Q4 performance. Q4 has been a challenging quarter for us given the surge in COVID cases with the second and third wave across many geographies. And this is true for a lot of other pharma companies also. In this tough environment, the company sales have dropped, actually come down by 4% sequentially and 0.8% year-on-year. The U.S. business saw a 4% growth sequentially with the continued ramp-up of albuterol. This is despite the continued impact of the weak flu season. Across various parts of the globe, a weak flu season impacted our sales growth book sequentially as well as over the previous year. However, in spite of the headwind from the growth of the company, we continued on the path of improved profitability. The operating EBITDA, excluding the onetime segment income in Q3 improved sequentially for the fifth quarter in a row due to improvement in the business mix and sustained measures on the cost front. We endeavor to drive our sales and profitability, but driving the profitability mix, bringing more niche products to our portfolio and continued improvement on our cost control and optimization initiatives. Sales for Q4, results of the Q were INR 3,759 crores compared to INR 3,917 crores in Q3, which is a 4% growth. However, there was a de-growth in America. If we saw versus the previous year, there's a degrowth over Q4. Coming to a geography by state. U.S. sales grew by 3.6% sequentially, USD 195 million in Q4 as compared to USD 188 million in Q3 and lower by 8% as compared to Q4 FY '20, which is USD 212 million. But you might also recall that because COVID was round the corner, and there was a surge in demand in anticipation of lockdown conditions in America, but also it was a normal flu season. The sequential growth is built up by ramp-up in albuterol and other new products like Posaconazole that more than offset the flu season declines quarter-on-quarter. Seasonal products continue to be weak on back of the weak season in the last decade, leading to a $36 million fall in sales of Oseltamivir, Azithromycin and cephalosporin as compared to Q4 FY '20. India business, Indian branded formulations saw a growth of 3.3% year-on-year as demand picked up. As per IQVIA, Lupin's growth in Q4 was 5.9%, it was 8.5% for the IPM. Our key product sales have grown in Q4 versus de-growth we have seen in Q1 and Q2 and is higher than Q3. For the full year, IRF exhibited a growth of 0.7% versus the previous year. As for IQVIA, IPM growth is 4.3% compared to Lupin growth of 3.9%. However, if you look at chronic therapies, Lupin has outperformed the IPM, it's 10.2% growth for Lupin as compared to IPM growth of 8.4%. API sales showed a 25.6% de-growth quarter-on-quarter due to lower volumes on some of our key antibiotic APIs on account of weaker flu seasons in most parts of the globe. And so far as EMEA and those markets are concerned, EMEA grew by 14.6% quarter-on-quarter due to strong demand in South Africa, NaMuscla and scale-up of Etanercept. Sales for growth markets is low by 8.3% sequentially due to the second wave of COVID hitting us in several countries. On the gross margins front, Q4 FY '21 gross margin was 65% as compared to Q3 FY '21 of 64.9%. This is driven by improvement in business mix in the U.S. driven by albuterol. However, an account of slowdown in seasonal products for flu season, we have had higher write-offs in this quarter. Thus the net improvement of just 10 basis points. Over the previous year, the margin improved by 210 basis points, which is primarily on account of better mix in the U.S. and higher API margins, is partly offset by higher freight rates and high growth in low-margin business in Brazil and Australia. We've done a stellar job when it comes to in fact the employee benefit expense. In Q4 FY '21, it was INR 640 crores as compared to INR 706 crores in the previous quarter. And if you recall, it was INR 764 crores in Q4 last year. Lower expenses in Q4 is largely due to onetime savings coming in from pruning up of annualized schemes and change in policy. We, however, expect employee costs to be sub 18% range in spite of the increments, which will kick in Q1. We've brought it down from less than -- from 20% levels in Q1 FY '21, when it was plus 20%, if you recall 22%, which is a very, very good achievement. Manufacturing other expenses. Q4 is at INR 1,125 crores as compared to INR 1,156 crores in Q3, and then INR 1,151 crores in Q4 FY '20. The decrease of INR 31 crores is driven by slow selling and promotion spend, offset the higher royalties on partner products. On the EBITDA front, as Dr. Sharma was saying, we have reported the fifth consecutive quarter of operating EBITDA margin improvement in spite of de-growth in sales. Operating EBITDA is 18.8%, excluding ForEx and other income for this quarter, was 20 basis points higher than normalized EBITDA of Q3. As you recall, Q3 whilst the top line EBITDA margins are higher, it is because of onetime settlement income. And we also appreciate that there has been continuous increase over the last 5 quarters, it has been a result of several initiatives that we have taken in terms of various initiatives on the cost front including procurement, routes for synthesis, renegotiating contracts, rationalization of in fact our sales force in America and other parts and so on. We continue to strive to work on this, and you'll see better -- certain improvements coming across in the future as well. We're particularly proud about our achievement of the effective tax rate on this plan. In the course of the year, we are investing on various initiatives to optimize the overall ETR and the fruit of this reflecting in the full ETR numbers, it come down from 40% last year to 26.7% for the full year. In this particular quarter, it is particularly low because we are kind of overflowed the previous quarter and we can roll it back. And it is also because of the fact that several of our subsidiaries turned profitable, especially America and Brazil, as you might have recalled, it breakeven last quarter. We expect the EPS to remain at similar level in FY '22 and we will be continuously working to further optimize on this. This is a short introduction. I would open the floor for discussion.

[Operator Instructions] First question is from Damayanti Kerai.

Am I audible now?

Yes.

Okay. So my first question is albuterol traction in the U.S. So first, how much market share we have reached because simply data is, I think, not reflecting the pickup yet. So that's my first question. And have you seen any change in market dynamics after recent entry of Sandoz in the market? So can you please comment on albuterol market?

So yes, market share so far as part as IQVIA reports it is at 8% level, it's is over 8%, and it is kind of lagging. Obviously, our suppliers are ramping up and the market share will continue to ramp up over the next few quarters. We haven't really seen any material change since the switch over to Sandoz of the Ventolin or AG. So there's really no shift in the market dynamics. It continues to be a very vast opportunity for us. And we continue to ramp up our supplies as well as market.

Vinita. So pricing is largely stable in the market, right, for albuterol?

Yes. So far, pricing has been stable.

Good to hear that. And my second question is on some update on the inhalers franchise. So can you update us on the status of Fostair launch in Europe? Earlier, you indicated to launch it by end of FY '21, and maybe you can comment on Brovana opportunity should be considered as CY '21 launch?

Yes. So both products we've made significant progress with the U.K. agency, with [indiscernible] and are expecting approvals soon. That should be a launch soon in the next few months. And Brovana will be another material product for us for calendar year '21, FY '22. So really, the inhalation portfolio, led by albuterol ramp up, then Fostair launch, Brovana, Perforomist will be a significant driver for fiscal year '22.

Next question is from Nithya Balasubramanian.

This is Nithya from Bernstein Research. A related question again on your respiratory dynamics portfolio. If you can update us on what you might have heard from the FDA or your Spiriva filing? And again, some color on when you expect to launch the product and how the litigation is progressing?

Yes. So we've had good communication with the agency. There's been a lot of back and forth over the last couple of months. We are in the process of responding to the agency's questions. And feel pretty good about getting the approval for next year. The litigation is later this fiscal year. Again, we have said in the past, we feel pretty good about our position and our ability to launch the product next fiscal year.

Okay. So is there clarity on do you have a minor CRL? Is this going to be once you respond, this is going to be a 6-month review process? 8 month review process? Can you put some color on that?

Yes, we have got priority review on the product. And we intend to respond in the next quarter and would hope that by middle of next year we -- even with one additional round of questioning, we should get approved.

Got it. The second question was on tax rate. Ramesh, you were alluding to this, but just to get some clarity on what is your guidance on the tax rate that you expect next year? Is this likely to be in line with fourth quarter?

Well, fourth quarter was really an aberration. So you could take the full year as past the guidance to the future as well. But 27%, 28% is that I would state.

Next question is from Kunal Dhamesha.

Kunal Dhamesha from Emkay Global. So 2 questions. First, on the employee expenses, you said there was some one-off. But I guess what was the quantum of that one-off? And that if you can share that, that would be great.

So I said the one-off is essentially because of the fact that we have provided for the sales incentives and the like, which shouldn't materialize because the fact that active sales is lower. So we've kind of rolled it back. So you could expect, in fact, an increase in the quarters to come. But overall, we're still keeping the overall costs on a least rate, so it's really been in the 18% range.

And the second question is on the status of various plants, with the currency and regulatory issue. Any update on that front? Are we seeing any progress in terms of the extra projects in our plants?

Well, as you know, FDA has come up with a remote interactive evaluation guidance. In the best of our understanding, that has not really kicked in meaningfully for any plant in India yet. So the status remains the same. We have told FDA that we're ready for our Goa, Pithampur Unit 2 and Tarapur plants. And we're hoping that this is going to be the way to engage with FDA because right now it's extremely unpredictable of when FDA wouldn't be able to travel to India. And we believe that this will be the way. I think it's a big positive that they've come up with this guidance, and it really is applicable for everything. It is for surveillance, it's for OAI where SA/PA's are complete. For PAI's as well. And we think that most other agencies have adopted this approach already, and we're hoping that the FDA will start reflecting it in their actions soon as well. We don't have update at this point of time. But I think the fact that the FDA has come up with a guidance and approach is a big positive.

Next question is from Neha Manpuria.

Neha from JPMorgan. Vinita, on the U.S. business, while albuterol, like you indicated, could see a ramp-up. Just wanting to understand what led to supplies being shorter than expected because instead you had indicated to the product gaining traction over the next few months, which hasn't really happened? What really happened and what gives us the confidence that this would improve going forward?

Yes, there were supply issues, especially coming out of the vail supplier in the U.K., just given the impact of the second wave. But we did get -- we did have a ramp-up of supply Neha, and that continues. We have a strong commitment now on supply. And we did ramp-up albuterol quarter-over-quarter. It doesn't show up in share as of yet because share will lag the market supply, but it will show up. As we get additional new data from IQVIA. So now that we have [indiscernible] on supply of vails, of course, I mean, everything is COVID permitting. I mean it seems very hard with the vial suppliers to ensure that we get what we need. We feel pretty good about that.

And we are still committed to the 20% market share fair share that you've indicated in the past?

That's right. I mean it's not going to be overnight, of course, we have been [indiscernible] to maximize and -- but we expect by the end of fiscal year '22.

And my second question is extending it on the U.S. business, given 1 of our 3 products would likely see erosion in the first quarter. We have, obviously, albuterol, just if you could give me a little bit of sense on how you see your U.S. business shaping up for FY '22 in terms of what we expect in new product launches, what would be the key products that could drive the growth in this business?

Sure. I mean, the largest part of the growth is the inhalation portfolio for fiscal year '22, starting with albuterol and then Brovana, Perforomist, all contributing towards growth in fiscal year '22. I mean our -- in the near term, early in the fiscal year, we have done decent job with additional competition on famotidine, which has been a material product, has been built into a material product for the organization. But and -- managing within that competitive landscape to hold on to significant share. And we built a lot of goodwill with the customers over time as we ramped up the product with ranitidine decline. It was -- we feel pretty good about holding on to significant share and maximizing value as much as we can. So a combination of -- I mean, so there are -- obviously, there is going to be erosion on the famotidine front. But we expect to more than make that up and support a very strong double-digit growth. But what we have planned around these are all the other inhalation products, Brovana, Perforomist. And also growth in our products. I mean, this past year, we had challenges from a supply perspective, COVID related. On the in line products, we expect to really get back to normalized levels IN fiscal year '22, which will also have the double-digit growth.

Next question is from Rohit Jain.

Can you hear me?

Yes.

My name is Rohit, I'm calling from Tara Capital Partners. I just had 1 high-level question. I just wanted to understand the promoter's commitment to the business. I mean, what I want to ask is are we committed over the medium to longer term? Or are we willing seller at the right price? The context of this question is that a lot of things keep coming up in the market. So just wanted to get some clarity over there.

Well, let us put that to rest, we are extremely committed to the business. To us, this is not just the business, it's our family's legacy. And we take a lot of pride in what we have built. We have, I believe that we've had a couple of challenging years, which maybe have led to this kind of rumor. But we are in a very strong position today. And then we've really turned around our business, have very significant growth drivers when we look at the next 5 years and our complex generic strategy, our specialty strategy, our biosimilar strategy, our India market growth prospects, our U.S. market growth prospects, other regions, we are very excited about the business and we'll continue this legacy.

Next question is from Mr. Prakash Agarwal.

Just some clarification here. I mean, obviously, double-digit growth with an exit rate of $195 million is done deal, right? So you were $800 million last year and fiscal year '21, you ended around $720 million for U.S. so I mean 10% is $800 million, and you're already doing $195 million. So I mean, I totally understand, last year, COVID year wider, and there was a mention of ceftriaxone, azithromycin and all our antibiotic business had a hit due to COVID also. Looking forward with so much in the pipe, which we just talked about, is there a broad level number we can work with for '22 and '23 in the U.S.?

Prakash, we don't like to guide, and we are still dealing with the impact of the pandemic, right? I mean, in India, in particular, from a supply perspective, the team has worked very hard to ensure that we continue. The challenges do pop up. So -- but we remain very confident of growing it. Our goal really in the next couple of years is to get to that $1 billion-plus sooner rather than later. But we know that we need to really get through a couple of quarters and just execute and deliver to make that happen. We certainly think that in the next 2 years, we have set to cross the $1 billion mark.

Okay. And tying this with the margin, and obviously, there was a comment that U.S. is just an EBITDA positive. So with this, adding about $200 million -- over $200 million over the next 2, 3 years. So I mean, there's a clear color you want to give in terms of margin expansion or reiterate what we have said in the past?

So actually, what Ramesh was mentioning about U.S. EBITDA positive was more the U.S. entity from a tax perspective, which has led to that optimization or tax from 40% the year before to 26%, 27% this year. The U.S. has always been EBITDA positive, and it has been very strong EBITDA contributor in fiscal year '21, will continue to be a bigger contributor in fiscal year '22 and beyond.

Prakash. I mentioned Brazil as EBITDA. America has always been possible. We took an impairment the last couple of years. And that's where we actually had a lot of NOL. So you're not paying taxes in Americas. It's what we meant.

Yes, fair enough. But any reiteration on the margin expansion, which we've said in the next 1 to 2 years?

Yes, we definitely expect margins to continue to expand. I mean, this year, past year, we've had a significant quarter-over-quarter improvement over the past 5 quarters, the 15% level to the 18.8% level. We expect to be 19% plus in the next fiscal year. And certainly, in fiscal year '23, across -- yes, we're working hard to get to that a 21% to 22% level.

That is very helpful. And last question on the India business. I mean there's a comment on the AICD, the industry body talks about monthly data points, there's a use of medicine to increase given the huge surge of direct and indirect COVID related products and after effects, these steroids leading to more diabetes, cardio, any sense there? Do you expect this overall use of drugs and the volume to increase what you have seen in the last year?

So I think in the near term, this is reflected, obviously, much more in anti-infectives and everything that goes into COVID care. And it's a pretty wide spectrum, right, from products like budesonide to products like baricitinib, Fabiflu and the like. So I think that's what we're seeing right now. But I think what is getting highlighted very clearly is that India is terribly under-indexed on the health care front. And there has to be investment. There certainly is heightened sensitivity around that. I think it's a real crisis, which is going on in India right now. And obviously, we are seeing a very grim situation. But I think it is hard to predict at this point of time, but everything seems to indicate that, obviously, there will be a heightened focus on health care going forward, and that will lead to further market expansion.

Next question is from [indiscernible]

First question, if you can quickly [indiscernible] that you're currently seeing for Levothyroxine ? And the rebound for metformin [indiscernible]?

Yes, so on Levothyroxine actually quarter-on-quarter we have grown share. At the start of the fiscal year, we were at the 12% market share level within the generic market. Today, we are close to 19%, 18.7% level. So we have seen a ramp-up quarter after quarter in Levothyroxine. Our team worked hard to deliver that, and we'll continue on that path to build shares on a profitable basis. On metformin, so we had to unfortunately get out of both Glumetza as well as Fortamet due to the NDMA concern, and we're very pleased that within a quarter our team got the product back to market, was at lightning speed that our team worked to make that happen. But you know as we go back into the market, we had to really own our share again. Very pleased to say that we already had 50% plus share in Glumetza again. Of course, like I said, we have to earn our way. So the pricing is at a different level, but it continues to be an important product in our portfolio. Fortamet, we are yet to launch, we are in the process of planning the launch of Fortamet, but we expect to launch that back again.

Can you just give some sense about the size of this product wise, why because this is a [indiscernible]

So we don't give product-wise sales, so I won't be able to provide...

Industry wise, industry wise market that one can consider [indiscernible]

I guess I would just say that Glumetza, at one point in time was a very important product in our portfolio, now a smaller products. Right, even in the past fiscal year, fiscal year '20, it was a smaller product, and it's even smaller.

My second question is on R&D and obviously having limitation on margins. So if we see the kind of R&D performance, of course, for the last 5-year period, what is the kind of cumulative R&D both for revenue as well as capital R&D spend of the company? And the comparatively kind of incremental revenue growth of business that you guys have provided. Then the trend may not be great or simply because the kind of [ contending ] upon R&D spend on the complex projects resulting in some interesting sales numbers. But I think the kind of [ cumulative basis ] we have at least 5 innovation products over current year -- over the next 2 years, I would say rather, which can possibly bring in a significant kind of internal shape or kind of hope for recovery on the business front and similar kind of implication on the margins driven by sales progress. But simultaneously, I think it is difficult for us to estimate the exact -- the [ moderations ] or understand what we can see or what you can see. So that may really surprise on the margin front. So if we can give these 2 [ aspects of therapy ], what expansion that the specialty projects that we will be seeing came from the possible core key product opportunity over the next 2 years? And what kind of -- if a further [ imposed ] on the margin side that we can achieve because of the moderation in the R&D spending?

Yes. So you have multiple questions there. But I'd say that your point was correct that it was front ended -- the investment was front-loaded on the complex generics on all our platforms, whether it is inhalation, complex injectables, biosimilars, it took time to establish them. It took time to establish capabilities. It took time to really get pipeline together, but we are starting to see the results of it. So as we look at now the inhalation portfolio paying off, we will see, in the next couple of years, the ramp-up of the inhalation portfolio-based business, then the injectables will start contributing. And we have now a very solid portfolio on the injectables front with the depot injectables, peptides, iron products, liposomal products through a partnership. So that will start contributing in the next 2 to 3 years. And biosimilars started contributing ex-U.S. with Etanercept. But in the next couple of years, we will start seeing contribution of products like pegfilgrastim and then ranibizumab and beyond. So definitely, when we look at mainly, we obviously are looking at return. And as we look at return over the next 5 years, the complex generics are our biggest growth drivers when you look at our 5-year plan. So our margins, our revenue. Revenues, of course, but also margins going forward. And overall, your question on R&D investments. As Ramesh said, at the beginning of the call that we have managed to keep our R&D investments under control. We were over 10% 2 years ago. We are at the 9% level in this past year. We will continue to -- it will continue to decline as a percentage of sales while our R&D investment continues to increase year-over-year, just given our revenue potential is also pretty strong now going forward. I hope that answers your question.

Yes, ma'am, it does to some extent. But is it fair to predict that the trajectory of the margin expense and target to be really strong over 3-year or 5-year, but it will be better to extend to 5 in this back-ended kind of trend? Or in the near -- in the event where it could be a staggered one, is it the kind of indication that we are talking about?

No, we expect to get to the 22% in a range. We can [indiscernible] to the very base. And whenever there is introduction of a newer product, it could spike up to the 26%, 27%, but come back to the same level. That's going to be our endeavor. And as Vinita and others sort of were saying, it's essentially going to be on the back of 3 things, essentially the kind of products that we would be bringing to the market. And Vinita did give us a flavor of the fact that we are looking at a host of complex stuff. The complex injectables, the inhalations, the biosimilars and of course, specialty itself at some point. So -- and that apart from that, we have been continuously working on cost improvements in terms of procurement policies, in terms of [ route synthesis ], renegotiating on contracts, looking at rationalization of our workforce on the sales front, on the R&D front and manufacturing front also. So all of this has been paying results. Obviously, there's more to come. It's a continuous exercise. But these, we do believe that we've been marching in the right direction in the last 4 to 5 quarters. There's more to be done during this quarter -- this year. We expect to between 19% to 20% would be potentially the target for FY '22. And an improvement on that in the next couple of years.

Next question is from Mr. [ Srinam Vishwanathan ].

So Etanercept, what is the update? How has the launch in Germany and Belgium played out and France markets and other markets, where target markets have the launches taking place?

So it is launched in the last 6 months, obviously, in Germany, Austria, Eastern European markets. France is yet to happen, but it's in the works. Germany was the highest priority market as we were building supplies for the partnership with Mylan, and we work to maximize that. So we have seen a ramp-up in revenues quarter-after-quarter between Q3 and Q4 on Etanercept, and we'll continue to expect that going forward as they launch in other markets, both in Europe as well as ex Europe, Australia and other countries.

And pegfilgrastim, is the go-to-market time lines, is it a happening this year?

Well, the go-to-market plans, yes. But we just filed the product, are still waiting for acceptance from the agency. And that facility has not been inspected by the FDA. So we're going to have to see how -- what the time line looks like from a FDA inspection standpoint, will they accept a remote inspection or will they want to really wait for on-site inspection. Really the inspection will be the determining factor on the launch date. But we're getting prepared to be in a position to launch within 15 to 18 months.

And so that's the India business. Would we expect that to grow in line with the market for this year?

Yes. So I think we should be back to double-digit growth. Obviously, the current quarter, we're seeing growth, but more connected with products for treatment of COVID. Otherwise, the market has started to bounce back. Doctors had come back. Now doctors are scaling back a little bit from clinics, patient footfalls have come down a little bit as well. But we expect double-digit growth in FY '22 out of India.

Last question is on the debt level. So can we expect it to go further down? Or are you have -- do you have any inorganic plans?

Obviously, so we are near debt free company. We have actually repaid our loans -- our [ guidance ] loans are -- they will close this quarter as I said. But you would also appreciate that it's not desirable to be debt free because it's possible you can trade on equity while having some debt on the balance sheet. And we have plans. So it's obviously plans for looking at acquisitions also. So we would raise up when the occasion really demands it. And that I think will be good for the shareholders also.

The next question is from Mr. Sameer.

A quick question on Revlimid. Vinita, how are you thinking of monetizing this asset? Can this be a 2022 calendar event like for 5 other companies?

Yes, Sameer, we are looking to see how we can bring it in sooner rather than later.

Okay. Excellent. And second question is on Spiriva. Vinita, just in terms of court process, where exactly are we in terms of discovery, market [ screening ] and what's your best guess, when could there be a full-fledged trial that can start?

I believe right now, it's running slow, but we'll pick up pace in September, Sameer. So September onwards based on the court proceedings, and we'll get a read on the time line, litigation time line.

Vinita, going by the other examples for me that happens to the patent challenge. It looks like the where your case is right now, it is almost impossible that you will get a district court ruling by middle of 2022.

Yes. So it would very much depend on -- I mean, in the last COVID year, we have seen that courts have been very efficient on remote proceedings. So we'll see what happens. But it has been slow, the litigation time table. So yes, it could take a little bit longer. We still expect the product to be launched this fiscal year '23.

Okay. That's very nice. And one final question is on -- I don't know how you'll respond on U.S. FDA. I'm sure the agency must be having a massive amount of backlog of both routine inspections, site inspection, product-specific inspection, and then all the OAI, warning letter, et cetera. So as and when things open up, what do you think will the FDA prioritize for this, virtual or physical? And what would it mean for companies like yours, which has multiple manufacturing sites? Can there be a bunching off from big issues? Is it -- will it be a bad news or good news, just your thoughts on this?

Maybe I can start, and Vinita, you could add. So first of all, I do think that FDA is a -- and I think FDA is very cognizant of the backlog that is getting created of surveillance. And in addition this, our [ lens ] inspections, just all the other inspections which are foreclosed. From our perspective, we had a great start last year up to March, where we had 6 consecutive positive outcomes out of FDA inspections. We've cited some of the observations, which have plagued us for a while like investigations as well. And yet, we received the IRs and satisfactory closures. We've worked a lot, especially on some of the India sites like Pithampur Unit 2, lesser so in Goa and Tarapur because there wasn't a deeper fix that we wanted to put in place. And we would welcome the flow of inspections to really start. As you know, I think we're over-indexed from the number of sites, which are -- add some degree of non-satisfactory compliance. And it is a clear organization goal that we have to overcome those.

We do think -- yes, just to add to that. I think the priority would be first to market product, first to files -- high-priority products, especially products that have -- or areas that have surged to COVID will continue to be a priority, we believe.

Okay. And one final, with your permission, if I may.

Mr. Sameer, sorry, sorry. [Operator Instructions] Next question is from Mr. Kunal Randeria.

So my first question is on the U.S. business. So I believe you have launched close to 15 products in the U.S. just this year. But if I go through press releases, I see the number of products in the market currently has gone down from 175 to 168 or so. Does this mean you're [ discounting ] around 20 to 22 products? Is my understanding correct over here? And if so, is the portfolio rationalization of SKUs complete? Or you're still looking to rationalize some of the nonprofitable SKUs this year?

Yes. So in the last couple of years, as we optimize the business, we definitely look at portfolio optimization. Where it didn't make sense, we got out of the product. But overall, it's behind us, the portfolio rationalization. We think that pricing, the kind of challenges that we faced until a year before last, we think, are behind us. And that's not to say that price will not continue to be a challenge. In the generic business, that continues to be a challenge, but we hope that the single-digit price erosion that we contend with, we can offset it with volume growth, cost reduction -- continuous cost reduction efforts. So we do think that the portfolio rationalization process is behind us.

And it would be fair to understand that this is what led to your gross margin improvement in the current year?

Well, the gross margin improvement is definitely product mix. A good part of it led by albuterol as well, high-margin products that we grew.

Sure. Okay. Sir, my second question was the India business. So I was just wondering, while Nilesh did mention you are going to see double-digit growth, any particular area or any particular therapy that just went particularly well for you? And any therapy where you're sort of lacking and growing behind the market, I think, especially acute side? So what's the strategy to revive these? Just a bit of more understanding on how you're looking at the India business.

So as you know, the big 3 areas for us in India are cardiac, respiratory and diabetes. In particular, diabetes is the fastest-growing amongst the segments, about 20% at this point of time on a significant base. Again, as I've said in the past, we're not #1 in any of these, right? So I think we're #3 in pretty much all 3 of them. And there is significant room for growth. So all these 3 will continue to be the big areas for us to grow. And obviously, we are weighted more towards the chronic side than the acute. Right now, we're seeing a resurgence on the acute, which is going to help pick up sales as well. But that's not the biggest strategic story. I think the biggest strategic story remains around these 3 areas. And then carefully adding others. We are very highly under-indexed in areas like dermatology, for example, and even weaker in areas like women's health or even in vitamins, minerals and supplements. So we're in everything, but I think the idea is to really build bigger brands and build deeper positions in select areas. But these couple of areas like dermatology, BMS are the areas where we would want to build, but the main focus will remain on these 3.

Next question is from Sir Ranvir Singh.

My question pertains to API business. So after witnessing a 3 quarters of very good number, we see an uplift in Q4. So what would be the run rate we should take on that API side?

Sure. So I think the API business, going down in Q4, is really a sign of the flu, the anti-infective business, how it's been impacted globally. Big products like Cefalexin and the like are significantly down globally. We talked about the U.S. pretty much having a nonexistent flu season this past year. The same has been the story in other markets as well. That has been the main reason for driving this. We do believe that it will start picking up. We already see signs of it picking up in important markets like China for us. And likely Q2 onwards, we would see it picking up again. There's a significant bunch of new products that we have planned on the API business as well. We've been lagging on building enough new big API products, and that is a focus area at this point of time.

Okay. So just wanted to understand from industry perspective also. The last 3 quarters for industry itself, that API business has been very strong. So wanted to understand whether the competition or pricing scenario is getting changed versus the last few quarters. That was what I wanted to understand.

Not really. And so I think we're all facing input cost increases from markets like China, for example. And I think that's pretty much across the API industry. But no, I don't think there's a fundamental change in the competitive dynamics, which is driving this. This is primarily demand-related.

Okay. And another related to that, that the API business normally get higher than the company's margin, average margin, or it is lower than the average margin on EBITDA front?

Typically at the gross margin level, obviously, finish product business would be of higher value. The API business is almost at a similar EBITDA margin as the company.

Next question is from Nitin Agarwal. Please unmute yourself, Mr. Nitin. Yes, you can go ahead. I think we are facing a problem. We'll go to the next question. The next question is from Cyndrella.

I want to understand over the past 2 years, the margin contraction that we have seen. If you can highlight what was our learning from. And which regionally, if you could highlight, which were the reasons which were actually creating this kind of impact? And what is the strategy going ahead to commit to the 22% level that we just set out to carve?

Actually -- no, go ahead. Please go ahead.

No. so essentially, as you would recognize, it's really a function of sales growth and cost. So if costs were to grow at a faster pace than sales, then you potentially have an EBITDA margin [ problem]. So the last couple of years, our sales were kind of stagnant whilst the expenses grew. And particularly in -- so for example, you've got [ manpower ] costs going up significantly, ramping up quite significantly. In the first quarter, it's rose to about 22%. So as long as we are able to bring in newer products and keep an eye on cost, we should be okay. And that's exactly what we've been trying to do over the last now several quarters. So we have been working on several projects when it comes to -- on several -- all the cost lines, so to speak, starting from gross margins, rising of costs, procurement costs as well as the cost of conversion. Those are -- right now, there's a lot of focus on that. We go to the external consultants to get that done, to get that focus. And of course, when it comes on those [ product ] lines, beyond that, when it comes to, for example, the indirect cost, SG&A expenses, contracts that we renegotiated with a host of vendors, we've brought in productivity gains on R&D as well as the sales force. We rationalized sales force in various parts. All of these kind of helped to kind of reign in the cost. And because there, we helped to be -- kind of brought down the overall mantle of cost as something that we alluded to in the course of this interview. We spoke about the fact that it came down. And during this quarter, it's been particularly low. So all of this helps, and of course, the introduction of products across various markets, across the most important markets would certainly help moving -- nudging the EBITDA margins forward going forward. And of course, there's always going to be continuous emphasis on cost reduction.

And regionally, if you have to highlight any particular reason, which was kind of...

The most important regions for us, so America remains the most dominant region. And that's the first one. We have never lost by taking the eye off the ball when it comes to India. So there is operating leverage in India, which we wanted to optimize on operating leverage in other parts, including Europe, APAC region, and of course, the Latin American region. So all of this, so I don't -- I wouldn't like to actually place emphasis on one particular region as being the cause for decline. It's similarly because of the fact that we have not had enough products growing for us in America.

Okay. No, I -- of course, we understand India and U.S. are the key regions. I just wanted to understand if there was any other region which was creating any kind of impact particularly? Or else it is the launch product -- product launches that we have seen brewing.

Other than that, we also have specialty losses in America because we, of course -- SOLOSEC didn't get the kind of levels that we it expected it to. That contributed to losses in America. And so we have rationalized the sales force in order to keep that on a leash.

Okay. And just to Vinita. Vinita, could you highlight our strategy on SOLOSEC going ahead? And any other new product additions, especially on the specialty side in U.S. that you would expect over coming 2 to 3 years?

Yes. So our strategy to the pandemic was to really conserve cost and restructure, which we have. Brought spend down significantly through a combination of reduced footprint of the sales force plus virtual interaction with the physicians. And at this point in time, we are focused on the next major lever, which is the tric launch, the trichomoniasis launch, which we hope to do in the next quarter, actually. We are waiting for feedback from the agency, and we'll time, really, a relaunch of the product, although still with a lower level of spend at this point in time. So that's where we are on SOLOSEC. I mean, with the changes that we have made, we expected some disruption. We have seen disruption. But in the last couple of months, we have started to see some growth, although minor. I think the major trigger for us is going to be tric, and likely see the impact in the second half of the fiscal year. And simultaneously, we look for other opportunities. We are looking at a couple of other opportunities right now that potentially will be accretive for the women's health business and building up the pipeline. We have had really good success with the 3 programs in the pipeline on the women's health front with the agency. And in particular, the 2 programs we've had success with the agency and are progressing them into the clinic very rapidly.

We're out of time. Maybe we'll take the last 2 minutes to take a couple more questions.

Yes. Sorry, as we are out of time, we'll just take last 2 questions. Next question is from [ Foram Parek ].

Yes, I have 2 bookkeeping questions. I see that raw material expenses as a percentage to sales have come down. And this is the second quarter where we have recorded -- we have reported lower percentage to sales. So I just wanted to know like what is the reason? And is it sustainable? And second question is on the CapEx front. Or do we intend to have any incremental CapEx in the next 2 years?

So firstly, on the raw materials front, so as I was just alluding to a few minutes ago, we have been working on, in fact, bringing on the overall procurement cost and the like. So some of it is because of bad outcomes of those initiatives. And of course, there's always the sales mix and the product the production mix that goes into the financials for a particular quarter. So it's actually really a direct result of that. The second is also on capital expenditure. What about that?

So do we intend to have any incremental CapEx in the next 2 years?

No. So our budget is -- so we really are into an optimization mode on everything, given idle time and all of that. So this year, we would think that it's going to be close to INR 1,000 crores.

Next question, and the last question for the day is from [ Harsh Vairya ].

I have a question on working capital of the business. So this has structurally increased from, let's say, 100-day level to like 150, 160 days. What is the sustainable working capital levels that you guys see going forward?

So there has been actually an absolute decline we saw at the previous quarter. But we get your point that it's actually gone up over the last couple of years, even now it's over the 145 days operating days. And we are trying to work on that. It's actually a function of [ matter ]. So when do you make those sales -- for anything you have done -- and as long as it is something that is within due dates, it doesn't get translated into cash. And that's the reason why you find that the overall accounts receivable, for example, is on the higher side.

Yes. This year, I think that the receivables actually did a little better...

This quarter.

Maybe because of the inventory, which contributed to higher working capital. I was wondering, like, can this come back to like 100, 120 days, like, in the next few years?

Yes, we were -- so we've been trying to work on all of that. But as I said, COVID also, there have been some supply chain disruptions and so on. So it really pays to kind of stock up. So it has been a function of the context that we are operating as well.

Thank you. I now hand over the conference to the management for closing comments.

Thank you. This brings us to the close of today's session. Hope you've got the clarity that you were seeking. I look forward to connecting with you all next quarter. And I'd like to thank you on behalf of my team for your continued interest in our company. And in the meantime, look after yourselves, take care, be safe and be healthy. Good luck. Thank you.

Thank you.

Thank you. On behalf of Lupin Limited, that concludes this conference. Thank you for joining us, and you may now exit the webinar.